Can you afford to live in your house?

by Sean Holstege - May. 7, 2010 12:00 AMThe Arizona Republic

For years, renters and homebuyers were told they couldn't afford a home if it cost more than 30 percent of their income.

Now, an influential research center has come up with another yardstick that it says more accurately measures whether your choice of housing is beyond your means: The combined cost of housing and transportation shouldn't exceed 45 percent of your income.

By that standard, only half of the Valley's neighborhoods are affordable for households earning the median income, according to the Chicago-based Center for Neighborhood Technology. Families earning less than $50,000 spend two-thirds of their income on those costs.

A higher share of Phoenix neighborhoods are out of reach for those families than are New York City neighborhoods for median-income earners there, the center said.

The analysis reflects a growing realization that the affordability of a neighborhood varies significantly by not only housing but also average transportation costs. And when those costs are heavy, they burden not only individual households but also a whole region's economy.

The concept is helping shape new federal and state policies to encourage development of more compact communities that aren't so far-flung and promote less driving.

In the Valley, most of the affordable areas lie within Loop 101, based on neighborhood averages for housing prices, travel patterns and transit availability. The West Valley, all of Chandler and Gilbert and most of Scottsdale and north Phoenix are unaffordable to median earners, who make $44,752 a year.

And the length of commutes is not the dominant factor.

Each neighborhood has a unique fingerprint of such costs. It's determined by the length of commutes and trips to run errands such as picking up kids from school, gasoline costs and the necessity of owning a car. The more spread out a neighborhood, the more people depend on cars, often needing more than one. The availability of mass transit is large factor.

Fluctuating gas prices make less difference than people think. At their peak, gas prices accounted for only 30 percent of transportation expenses. A typical Valley household pays $5,000 to $7,000 a year for a vehicle regardless of gas prices, the distance to work or the fuel efficiency of the car because the costs of insurance, car payments and upkeep pile up.

The Center for Neighborhood Technology's study was based on demographic, economic and transportation data from 337 U.S. metropolitan areas. The research shows homes are far less affordable than most people thought because they fail to count the cost of getting around. Although the data is mostly based on the 2000 census, researchers say the problem is greater today because incomes haven't kept pace with costs despite the collapse in housing values.

Advice for buyers

Valley housing counselors say they've witnessed the devastation of high transportation costs on families and advise homebuyers to budget accordingly.

John Smith, president of Housing Our Communities, said his non-profit helps somebody buy a house every three days.

"I see a lot of them choosing to live inside the city," he said. Unlike in past years, his clients are looking at far-flung suburbs like Anthem and Maricopa, "and saying that's pretty far."

Smith said the many foreclosures in such suburbs are no surprise.

Linda Osuna is the director of foreclosure prevention at Newtown, another Valley housing-counseling service.

"People losing their homes and jobs have to focus on where they can go. 'Should I downsize into an apartment in Phoenix? Can I get rid of a car payment?' " she said. "I have clients who bike in because they can't afford car payments and are trying to find employment that is not more than 5 miles away."

Beyond a 10-mile radius from work, commuters see any savings from lower housing costs rubbed out by increased transportation costs. When they "drive until they qualify" for housing, they are still taking on a bigger burden.

Federal policies

The new measure of affordability is gaining traction with the Obama administration, which is weaving it into its "livable communities" policies.

The push is to promote housing, transportation and environmental projects that encourage compact, sustainable communities. Federal grants will be tied to the policies. Already, the U.S. Department of Transportation, Department of Housing and Urban Development and Environmental Protection Agency are collaborating.

Leaders at the Arizona Department of Transportation say they understand that in a world of sharply declining revenue, they have to pivot to take advantage.

"We have to grab hold of this moment and recognize it for what it is," ADOT Director John Halikowski told a group of urban planners recently. "It's an opportunity to reshape the face of transportation for the 21st century."

Other regions also are shifting policies.

The Illinois Legislature passed a bill requiring state agencies to factor in both housing and transportation costs when investing in urban areas. In the San Francisco Bay Area, the Metropolitan Transportation Commission has set a goal of reducing the burden of combined housing and transportation costs by 10 percent for low- and moderate-income families.

To accomplish this, the planning agency has set aside about $40 million for grants to cities that opt to develop near transit and has made money for new rail projects whose station-area zoning provides for density and mixed use.

"The real thing that matters is what is on the ground, what gets built. It's not about driving a Prius. It's about not having to drive so much in the first place," commission spokesman Randy Rentschler said.

Economic logic

Scott Bernstein, president of the Center for Neighborhood Technology, said city leaders see expanded mass transit as key to stabilizing their economies.

Big investors are finding that transit and transit-centric development make economic sense.

Shannon Scutari, ADOT's rail and sustainability chief, said regions that don't adjust to the new reality will be left behind when the economy recovers.

Cities reap more economic benefits from urban development spurred by rail transit than what they spend on the line itself, Bernstein said. And, in today's market, investors are eyeing communities that promote projects in a city's core.

"Phoenix is at risk that it can't achieve its economic potential, if the cost of basic services such as transportation and energy rise faster than the region's ability to pay for them," Bernstein said. "It will fail to attract investors. The growth engine turns off."

In 2008, audit firm PricewaterhouseCoopers placed the Phoenix region in the middle of the pack for its attractiveness for private investment for commercial and multifamily development. This year, Phoenix is third from the bottom in a list of the 50 largest markets, above only Detroit and Las Vegas.

Moody's Investors Service gave the Valley a bleak assessment, citing high foreclosures and bankruptcies, low job creation, high energy prices and the collapse of housing values as reasons the Valley is a bad bet. But Moody's listed projected population growth and transit investments as bright spots, and PricewaterhouseCoopers said investments in mixed urban development, dense student and senior housing, and infrastructure would improve Phoenix's lure to investors.

The region is better poised than many might think, Bernstein said. Neighborhoods of greater than eight units per acre support light-rail service, and a higher proportion of Valley residents live in such neighborhoods than in some strong transit cities, including Portland, Ore., he said.

Moreover, there is pent-up demand for 160,000 households to move near planned light-rail lines in the Phoenix area, Bernstein said.

Investing in urban rail doesn't just help the pocketbooks of residents who choose to live near transit and get rid of a car. People switching from a suburban home to an urban one would save $3,600 a year, Bernstein's researchers found. If half of the growth in population between now and 2030 occurs in the central urban core, Phoenix households will save $2 billion a year, which they can plow back into the local economy.

Location trumps gas

Gasoline prices grab the headlines, but they often are not the key to slashing your transportation costs. A bigger factor can be location of your house.

If you live in the Verrado area of Buckeye, for example, you pay $2,997 a year on average in gas and car repairs, according to the Center for Neighborhood Technology.

Move to central Phoenix near Third Street and Earll Drive and the average cost drops to $923.

But the total transportation cost, including insurance and car payments, doesn't fall as dramatically with the move: from $9,834 in Verrado to $7,008 in central Phoenix. To achieve megasavings, you must sell a car or radically reduce your driving. And in the Valley, living close to transit is the best way to do so. Light-rail or bus service is available in central Phoenix but not in Verrado.